When Marketing Is Strategy – Harvard Business Review
Consider a consumer’s purchase of a can of Coca-Cola. In a supermarket or warehouse club the consumer buys the drink as part of a 24-pack. The price is about 25 cents a can. The same consumer, finding herself in a park on a hot summer day, gladly pays two dollars for a chilled can of Coke sold at the point-of-thirst through a vending machine. That 700% price premium is attributable not to a better or different product but to a more convenient means of obtaining it. What the customer values is this: not having to remember to buy the 24-pack in advance, break out one can and find a place to store the rest, lug the can around all day, and figure out how to keep it chilled until she’s thirsty.
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Companies are still organized around their production and their products, success is measured in terms of units moved, and organizational hopes are pinned on product pipelines. Production-related activities are honed to maximize throughput, and managers who worship efficiency are promoted.
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The strategic question that drives business today is not “What else can we make?” but “What else can we do for our customers?” Customers and the market—not the factory or the product—now stand at the core of the business. This new center of gravity demands a rethink of some long-standing pillars of strategy: First, the sources and locus of competitive advantage now lie outside the firm, and advantage is accumulative—rather than eroding over time as competitors catch up, it grows with experience and knowledge. Second, the way you compete changes over time. Downstream, it’s no longer about having the better product: Your focus is on the needs of customers and your position relative to their purchase criteria. You have a say in how the market perceives your offering and whom you compete with. Third, the pace and evolution of markets are now driven by customers’ shifting purchase criteria rather than by improvements in products or technology.
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Must Competitive Advantage Be Internal to the Firm?In their quest for upstream competitive advantage, companies scramble to build unique assets or capabilities and then construct a wall to prevent them from leaking out to competitors. You can tell which of its activities a firm considers to be a source of competitive advantage by how well protected they are…
Downstream competitive advantage, in contrast, resides outside the company—in the external linkages with customers, channel partners, and complementors. It is most often embedded in the processes for interacting with customers, in marketplace information, and in customer behavior.
A classic thought experiment in the world of branding is to ask what would happen to Coca-Cola’s ability to raise financing and launch operations anew if all its physical assets around the world were to mysteriously go up in flames one night. The answer, most reasonable businesspeople conclude, is that the setback would cost the company time, effort, and money—but Coca-Cola would have little difficulty raising the funds to get back on its feet. The brand would easily attract investors looking for future returns.
The second part of the experiment is to ask what might happen if, instead, 7 billion consumers around the world were to wake up one morning with partial amnesia, such that they could not remember the brand name Coca-Cola or any of its associations. Long-standing habits would be broken, and customers would no longer reach for a Coke when thirsty. In this scenario, most businesspeople agree that even though Coca-Cola’s physical assets remained intact, the company would find it difficult to scare up the funds to restart operations. It turns out that the loss of downstream competitive advantage—that is, consumers’ connection with the brand—would be a more severe blow than the loss of all upstream assets.
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Must You Listen to Your Customers?A company is market-oriented, according to the technical definition, if it has mastered the art of listening to customers, understanding their needs, and developing products and services that meet those needs. Believing that this process yields competitive advantage, companies spend billions of dollars on focus groups, surveys, and social media. The “voice of the customer” reigns supreme, driving decisions related to products, prices, packaging, store placement, promotions, and positioning.
But the reality is that companies are increasingly finding success not by being responsive to customers’ stated preferences but by defining what customers are looking for and shaping their “criteria of purchase.”… And even when consumers do know what they want, asking them may not be the best way to find out. Zara, the fast-fashion retailer, places only a small number of products on the shelf for relatively short periods of time—hundreds of units per month compared with a typical retailer’s thousands per season. The company is set up to respond to actual customer purchase behavior, rapidly making thousands more of the products that fly off the shelf and culling those that don’t.
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Those criteria are also becoming the basis on which companies segment markets, target and position their brands, and develop strategic market positions as sources of competitive advantage. The strategic objective for the downstream business, therefore, is to influence how consumers perceive the relative importance of various purchase criteria and to introduce new, favorable criteria.
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Must Competitive Advantage Erode over Time?The traditional upstream view is that as rival companies catch up, competitive advantage erodes. But for companies competing downstream, advantage grows over time or with the number of customers served—in other words, it is accumulative.
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Network effects constitute a classic downstream competitive advantage: They reside in the marketplace, they are distributed (you can’t point to them, paint them, or lock them up), and they are hard to replicate. Brands, too, carry network effects.…
Indeed, the very nature of network effects is that they are accumulative. But other downstream advantages—particularly those related to amassing and deploying data—are accumulative as well.
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Can You Choose Your Competitors?Conventional wisdom holds that firms are largely stuck with the competitors they have or that emerge independent of their efforts. But when advantage moves downstream, three critical decisions can determine, or at least influence, whom you play against: how you position your offering in the mind of the customer, how you place yourself vis-à-vis your competitive set within the distribution channel, and your pricing.
If you’re in the beverage business and you’ve developed a rehydrating drink, you have a choice of how to position it: as a convalescence drink for digestive ailments, as a half-time drink for athletes, or as a hangover reliever, for example. In each instance, the customer perceives the benefits differently, and is likely to compare the product to a different set of competing products.
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Although choosing to avoid competitors may minimize head-on competition, there is no guarantee that you won’t still have to contend with competitors you didn’t want or ask for. But if you’ve done your homework and established dominance on your criterion of purchase, me-too competitors will be putting themselves in an unfavorable position if they choose to follow you.
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Does Innovation Always Mean Better Products or Technology?Companies compete ferociously against one another not to prove superiority but to establish uniqueness. Volvo does not claim to make a better car than BMW does, nor the other way around—just a different one. In customers’ minds, Volvo is associated with safety, while BMW emphasizes the joy and excitement of driving.
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Where Else Does Innovation Reside?The persistent belief that innovation is primarily about building better products and technologies leads managers to an overreliance on upstream activities and tools. But downstream reasoning suggests that managers should focus on marketplace activities and tools. Competitive battles are won by offering innovations that reduce customers’ costs and risks over the entire purchase, consumption, and disposal cycle.
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Reducing costs and risks for customers is central to any downstream tilt—indeed, it is the primary means of creating downstream value.
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Is the Pace of Innovation Set in the R&D Lab?The product innovation treadmill is an upstream imperative. In fact, technology innovations are sometimes thought to be the greatest threat to competitive advantage. But such changes in the market are relevant only if they upend downstream competitive advantage. … technological improvements don’t drive the pace of change in the industry—marketing clout does.
Market change can be evolutionary, generational, or revolutionary, and each type can be understood in terms of consumer psychology. Evolutionary changes push the boundaries of existing criteria of purchase: higher horsepower or better fuel efficiency for cars, faster processing speeds for semiconductor chips, more-potent pills. Generational changes introduce new criteria that complement old ones, often opening up new market segments: sugar-free soft drinks, hybrid vehicles, pull-up diapers, once-a-day medications where multiple pills were previously required. Revolutionary changes don’t just introduce new criteria, they render the old ones obsolete: The new video-game controllers from Nintendo Wii changed how people interact with their games; touch screens and multitouch interfaces changed what customers expect from a smartphone…
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High failure rates for new products in many industries suggest that companies are continuing to invest heavily in product innovation but are unable to move customer purchase criteria. Technology is a necessary but insufficient condition in the evolution of markets. It’s the downstream activities that move customers through evolutionary, generational, and revolutionary changes.
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The downstream tilt has particular resonance for three kinds of companies: The first is companies that operate in product-obsessed industries, such as technology and pharmaceuticals. The possibilities of downstream value creation and the potential for building competitive advantage in the marketplace tend to be eye-opening for such firms. The second is companies operating in maturing industries whose products are increasingly commoditized. These firms are keen to find sources of differentiation that do not rely on easily replicated products or production advantages. The third is companies seeking to move up the value chain. Downstream activities provide a way to build new forms of customer value and lasting differentiation.
The critical locus of both value and competitive advantage increasingly resides in the marketplace rather than within a company.